Indirect shareholding is not covered under the fiction of deemed dividend u/s 2(22)(e) – Karnataka HC

CCIT v Sarva Equity (P.) Ltd [IT APPEAL NOS. 322 TO 324 OF 2014 dtd 08.01.2014] – Karnataka HC


Assessee and Ittina Properties Private Limited are sister concerns. The assessee had taken an unsecured loan from Ittina of Rs.9,56,48,107. The AO  treated the loan as a deemed dividend under Section 2(22)(e).  The Directors and shareholders of both the companies, are members of one and the same family and they have substantial holding in M/s. Ittina and assessee company.

The Appellate Authority reversed the order passed by the Assessing Officer holding that the respondent-assessee is not a shareholder of M/s. Ittina Properties Private Limited and in view thereof, not liable to pay taxes under Section 2(22)(e) of the Act. The order of the appellate authority has been confirmed by the Tribunal.

Assessee’s contentions:

  • These amounts were paid as advance by M/s. Ittina to the assessee as routine business transactions.
  • Reliance is placed on ruling of Bombay High Court in CIT v. Universal Medicare (P.) Ltd. [2010] 324 ITR 263 to contend that since the assessee  is not a shareholder of M/s. Ittina from which it has received monies, which are in the nature of loan or advances, the same are not covered by the definition of the word “dividend” as contained in Section 2(22)(e) of the Act.
  • As observed by the Bombay High Court in Universal Medicare, Clause(e) of Section 22 is not artistically worded. This clause can be divided into three parts/has three limbs, as follows:
    Any payment by a Company, not being a company in which the public are substantially interested by way of advance or loan:
    i) to a shareholder, being a person who is the beneficial owner of shares holding not less than ten percent of the voting power;
    ii) or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest; and
    iii) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.
  • In the instant case, the second limb of Section 2(22)(e) of the Act is applicable namely, to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest.
  • The definition of dividend has been enlarged, and that loan or advances given under the conditions specified under this provision would also be treated as dividend. The fiction, however, is not to be extended for enlarging the concept of shareholders. Dividend is to be given by any company, to its shareholders.  
  • If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of deeming shareholder, then the legislature would have inserted deeming provision in respect of shareholder as well. The legislature has not done so.
  • A beneficial owner of shares whose name does not appear in the Register of shareholders of the Company cannot be stated to be a shareholder. He may be beneficially entitled to the share but he is certainly not a shareholder.
  • It is only where a loan is advanced by the Company to the registered shareholder and the other conditions set out in Section 2(22)(e) of the Act are satisfied, that amount of loan would be liable to be regarded as deemed dividend within the meaning of this section.

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